What can other emerging economies learn from China's ETS experience?
The Indian government is especially conscious of the potential for cost impacts on consumers. It recently introduced a goods and services tax (GST) and this is still in the process of gaining community acceptance. In addition, the clean energy tax levied on coal has been passed on to consumers in their electricity bill. In this context, adding new costs in the form of carbon pricing may not be viewed positively by power consumers. During the pilot ETS phase, and going into the national system, China has developed a compromise solution in which large electricity consumers, such as industry as well as public and private institutions, are provided with an emissions cap and allowance allocation in the carbon market in relation to their indirect electricity consumption. While the lack of complete cost pass-through means that efficiency incentives are downstream, it does help to protect consumers from the cost impact.
3. Involve vested interests to balance industry concerns with ETS goals
Energy transition inevitably requires producers of energy and industrial products to bear some disruption and costs. While some find ways to move away from fossil fuel- dependent production, others resist change or actively lobby against carbon pricing. Through China's seven regional pilots, the Climate Change department, which is currently within the Ministry of Ecology and Environment, together with key advisers, has prioritized and gained experience in handling the concerns of industry during the policy design process.
They have engaged industry representatives throughout in a number of ways. Companies and sectoral associations sit on committees together with think tanks, government representatives and policy design advisers. ICF together with other local partners has facilitated some of these processes in multiple projects and initiatives through roundtable discussions for industry stakeholders and government advisers. These activities help to draw out opinions on carbon pricing as a way of overcoming the lack of open public debate that takes place in Europe and North America. Some of these workshops provided policy recommendations and feedback loops to policymakers, others enabled exchange of experiences and concerns among market participants and stakeholders. Working with China Carbon Forum, ICF also conducts large-scale surveys of China's carbon pricing stakeholders.
The policymaking environment in India differs in significant ways from China's, where the high concentration of state-owned industry often gives companies a direct line to policymakers. As in many other emerging economies, most industry in India is not state owned and is able to lobby more publicly, potentially influencing public opinion to pressure policymakers on the design of carbon pricing. Still, the principle of balancing the interests of industry and emissions reduction remains the same and, while specifics may vary, emerging economies could benefit from engaging with China about their experience of this process.
4. Factor in existing emissions-reduction measures for optimal ETS design
Every ETS needs to be designed with regard to other measures which may also lead to emissions reduction. Energy efficiency standards, mandatory closure of facilities, pollution mitigation policies and economic slow-down can all impact demand within the carbon market by enabling companies to more easily meet their cap without buying ETS credits. In China, the effects of a range of policies have informed the design of its ETS, in particular the reform of its power sector.
Power sector reform is a prime example of a measure likely to lead to emissions reduction regardless of the ETS. By planning to start operation of its national ETS exclusively in the power sector, the Chinese government has opened up the opportunity to carefully consider how to coordinate these two policies. With help from expert advisers, it is currently looking at how best to calibrate allowance allocation to maintain a carbon price incentive in the ETS in the context of the reform process.
Concerns around consumer impacts in India may mean that with the introduction of an explicit carbon price overlapping policies that risk double-taxing consumers are abolished. While the issues will, again, be different in other emerging economies, China can usefully share its experience of coordinating carbon pricing with other policies and instruments to help ensure the long-term success of its carbon pricing measures including ETS.
In fact, one of the most important lessons any country can learn about ETS design is that dialogue with others that have been there, made mistakes and found creative and feasible solutions can positively impact the process—and the outcome.